STRENGTHS

WEAKNESSES

High dependence on the United States economy; vulnerable to changes in the NAFTA agreement

Rising criminality rate

Infrastructure and education weaknesses

Oil sector undermined by years of underinvestment

RISK ASSESSMENT

Activity accelerated in Q1 2018; further momentum is unlikely

GDP grew by 2% in 2017 and accelerated to 2.3% year-on-year in Q1 2018. This upturn in activity was observed despite a tight monetary policy (policy rate stands at 7.75% per annum), and the uncertainties related to both the presidential elections and the NAFTA renegotiation. The relatively higher outcome in the first quarter of the year was supported by consumption and investments. The former was driven by the impact of decelerating inflation over real wages and by solid remittances from expatriates in the US, while the latter was mainly related to reconstruction works following the earthquakes of September 2017.

Nonetheless, activity might marginally decelerate in the upcoming quarters. According to preliminary figures for the second quarter, seasonally adjusted GDP proxy rose by 1.4% year-on-year in April 2018, down from 2.4% in the previous month and 2.3% in February 2018. On the one hand, robust activity in the United States should continue to support high remittances and a strong demand for Mexican manufactured goods. Moreover, household consumption could also benefit from the intention of the recently elected president Andrés Manuel López Obrador (AMLO) to double minimum wage by 2024. A measure that is however easier said than done. On the other hand, reconstruction works should lose strength in the months ahead and the Nafta renegotiation is not expected to be concluded anytime soon. In fact, more recently US president Donald Trump has raised its protectionist rhetoric.

Manageable twin deficits

Mexico´s current deficit narrowed in the year 2017, driven by higher non-energy trade surplus and smaller income deficit (lower profit repatriation from foreign firms). It dropped from 2.1% of GDP in 2016 to 1.6% in 2017 and further shrunk to 1.3% in Q1 2018. This current account deficit remains comfortably covered by foreign direct investments (1.8% of GDP in 12 - month cumulative until March 2018). It is worth, however, noting, that FDI flows shrunk to 2.2% of GDP in Q4 2017 from 2.7% a year earlier. The uncertainties related to elections and to the Nafta must have taken a toll on foreign investments in the country.

In the meantime, the fiscal policy has remained prudent. Oil revenues account for roughly a third of government ´s revenue. As such, the drop in oil prices has prompted a tightening of the fiscal policy that has been well executed. Fiscal deficit improved to 1.1% of GDP in 2017, from 2.5% of GDP in 2016 and 3.4% in 2015. In 2018, it is however expected to deteriorate somewhat, driven by the higher public expenses related to the reconstruction works following the earthquakes. Nevertheless, the latter is not expected to considerably impact the reduction of the government’s debt burden.

Leftist candidate scores landslide victory in presidential elections

On the 1st July 2018, leftist contender Andrés Manuel López Obrador (AMLO) from the Morena party won the presidential election race with 53% of the votes, defeating Ricardo Anaya of the PAN party and José Antonio Meade of the ruling PRI party. In parallel, according to preliminary figures, AMLO’s “Together We Will Make History” coalition assured a majority in Congress. AMLO’s victory represents the end of Mexico’s long-lasting two-party hegemony between the PRI and the PAN party. His landslide victory was mainly credited to the environment of general dissatisfaction with the political class, amid several corruption scandals, as well as to climbing violence in the country.

Although AMLO has been associated with populism – in the past, he positioned himself against the NAFTA agreement, privatizations (notably in the energy sector in late 2013), and the trade opening of Mexico – he has more recently softened his rhetoric. In his victory speech in early July, AMLO pledged to respect contracts, central bank independence, and fiscal discipline. His Finance Minister, Carlos Urzúa, has promised to keep a primary surplus enough to stabilise the current debt level. In addition, the new government has promised to increase public investments and social programmes without raising taxes, with the necessary resources coming from reduced tax evasion and corruption. However, it seems overly optimistic to believe that the government will be able to balance higher public expenses solely via these two measures. Mr Urzúa has said that extra public expenditure would be halted if the corresponding resources are unavailable. Last but not least, concerning the Nafta renegotiation AMLO said he would work to keep Mexico in the NAFTA and seek a frank and friendly dialogue with the United States.

Last update : July 2018

PAYMENT

The most commonly used methods of payment in Mexico are cheques, wire transfers and - in some special cases - credit cards.

In Mexico, the documents most frequently related to commercial transaction are invoices, promissory notes, and cheques. Promissory notes and cheques also serve as certificates of indebtedness. Once buyers possess the relevant information, they can proceed to make payments by wire transfer or cheque, with both methods taking approximately ten to fifteen working days. Wire transfers are more common, as cheques can be post-dated, thus presenting the risk that buyers will issue cheques that they cannot finance.

Promissory notes are unconditional promises, in writing, to pay a person a sum of money. In Mexico, this document is normally used as a guarantee of payment from the buyer. It is signed by the legal representative of the buyer - and hence, the debtor – for an amount which is superior to the total amount of the debt.

Corporate payment processes are governed by companies’ internal policies. Most companies request supporting documentation from the other party before proceeding with a transaction (e.g. the company’s articles of incorporation, or its tax identification, known as the Registro Federal de Contribuyentes).

Invoices

Invoices are commercial documents issued by sellers to buyers, which list the goods sent or services provided, along with a statement of the sum due. In terms of debt collection, original invoices act as proof of the acceptance of the debt and the establishment of a commercial relationship between the parties. According to commercial and civil laws, the commercial agreement is sealed by two elements: an object (in this case the product or the service), and the price of the object as agreed by the parties. Even in the absence of a written agreement, an invoice provides both of these elements. Invoices are therefore the most effective form of proof in a lawsuit situation, as they show that the parties made a sale agreement and have a reciprocal obligation to pay the price agreed and to deliver the goods or provide the service.

In 2014, the Mexican Tax Authorities (Servicio de Administraci Servicio de Administración Tributaria, SAT) ruled that all invoices must be electronic, with an XML file. They must also be verified by the tax authority system in order to be validated. The tax authority also requests electronic confirmation when the creditor receives payment, along with a receipt in an XML file as legal confirmation. These new requirements entered into force in December 2017. The goal of these changes is to limit the amount of fraud cases and ghost companies, both of which are prevalent in Mexico.

Debt collection

Amicable phase

Before entering into legal proceedings in Mexico, creditors normally attempt to contact their debtors via telephone. If this is unsuccessful, a written letter is sent to the debtor, in which the debtor is notified of the amount of the debt and the creditor’s intentions to negotiate payment terms.

The next step is a visit to the debtor by a collection specialist. During this visit, the collection specialist will attempt to develop a more detailed perspective on the debtor’s situation. The specialist will endeavour to ascertain if the company is still in business and if it has assets (such as real estate, merchandise or other rights) that could be seized in the event of a legal process. The main purpose, however, of such a visit is to understand why debtors did not pay their invoices within the allotted time frame.

Due to the increasing complexity of Mexico’s financial situation, particularly during 2017, amicable settlements have become less and less successful. When creditors initiate collection actions with an amicable phase, it is common for debtor companies to disappear altogether. This means the discontinuation of commercial activities which could potentially enable the payment of sums due. This scenario intensified further towards the end of this year.

When entering into commercial export relationships, companies are advised to ensure that all documentation conforms to Mexican law. A lack of correct information and documentation opens exporters up to the possibility of fraud committed by Mexican companies and reduces the likelihood of successful debt recovery during an amicable phase.

Legal proceedings

There are three types of proceedings which can be initiated against debtors:

Pre-Legal Process (Medios Preparatorios a Juicio Ejecutivo Mercantil)

This pre–legal process takes place when there is an invoice as a proof of the pending payment and of the commercial relationship. Creditors request that the judge obtains a citation from the debtor or its legal representative. He then obtains the confession and acceptance of debt from the debtor, as well as the pending payment. As the confession before the judge is an executive document, the creditor is then able to initiate the ‘Summary Business Proceeding’ legal process.

This pre–legal process takes approximately two or three months.

Summary Business Proceeding

This legal process takes place when there is a Certificate of Indebtedness (promissory notes, cheques or legal confessions before the judge by the debtor or its legal representative). The process begins with the phase of citation, when the creditor initiates the lawsuit by requesting that the debtor pays the total amount of the debt due. If the debtor does not have sufficient funds, the creditor can request that some of its assets be seized. These assets can include real estate, merchandise, bank accounts, industrial property rights and trademarks, to be used as a guarantee against the total amount of the debt.

Once the assets are seized as a guarantee of the debt, the legal process continues until the judge renders his final resolution. Then, if there is no negotiation or payment, the creditor can initiate the auction of assets to recover the debt.

This legal process takes approximately six to eighteen months, although this can vary from case to case.

Ordinary Business Proceeding

Ordinary Business Proceedings are the most time consuming procedure in Mexican commercial law. They can take place in the absence of a Certificate of Indebtedness, which means that the only proof of a commercial sale between the parties is the commercial agreement with invoices. In this type of process, assets can only be seized as a guarantee of the total amount of the debt when the judge has rendered his final sentence condemning the debtor to make payment. This legal process takes approximately one to two years.

Oral Proceedings

Oral proceedings take place when the total amount of the debt does not exceed EUR 31,856.68. As with ‘Ordinary Business Proceedings’, assets can only be seized as a guarantee of the total amount of the debt when the judge has rendered his final judgment condemning the debtor to pay the amount due. This process, which was established under commercial law on 11 January 2013, takes approximately four to six months.

On the 2nd May 2017, Mexican congress made a modification which ruled that all commercial disputes be processed through Oral Proceedings, with no limitations on amounts, with effect from the 25th January 2018.

Enforcement of a legal decision

A judgment is enforceable as soon as it becomes final. If the debtor does not comply with the judgment, the creditor can request a mandatory enforcement order from the court, in the form of an attachment order, sale of specific assets, or liquidation of the company. This takes between six months to two years.

Foreign judgments can be enforced through exequatur proceedings. The court will verify that certain requirements are fulfilled, prior to recognising the foreign decision. The court establishes whether the foreign court had jurisdiction to decide on the issue and whether enforcing the decision will not conflict with Mexican law or public policy.

Insolvency proceedings

Out of court proceedings

Debtors with the approval of creditors holding 40% of the debt can constitute a ‘pre-packaged’ reorganisation agreement. This enables the court to issue an insolvency declaration and declare the company in concurso mercantile.

Liquidation

Liquidation can only be requested by the debtor itself, but the debtor can be placed into liquidation as a result of its failure to submit an acceptable debt restructuration proposal to its creditors through the concurso mercantile proceedings. A liquidator is appointed and given the responsibility for managing the company, selling its assets and distributing the proceeds to the creditors according to their rank.